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Last year saw significant regulatory changes impact the cryptoasset space, and 2022 is poised to bring more significant regulatory activity that will shape the industry long into the future.
With more consumers holding crypto-assets than ever before, and financial institutions stepping in, regulators are rushing to grapple with the implications of widespread adoption of digital assets.
As a result, Elliptic expects that consumer protection will be the a major issue of regulatory focus in 2022, and consumer protection authorities will become major forces shaping the crypto space. You can register to receive the full report, here.
To date, the primary focus of regulators globally has been to address money laundering and terrorist financing risks from crypto-assets. Since the US Treasury Department first published its 2013 guidance in relation to cryptoassets, AML/CFT and transaction monitoring requirements have been introduced worldwide to combat the exploitation of cryptoassets by illegal actors. Several iterations of the Financial Action Task Force (FATF) digital assets guidance have emphasized this focus on AML/CFT regulation.
Regulation that looks beyond measures to prevent money laundering and terrorist financing
As the industry matures and becomes more integrated with the traditional financial system, regulators are looking beyond AML/CFT measures to focus on protecting consumers from crypto-asset risks and ensuring market integrity. This is especially relevant as theirs market capitalization has grown tenfold since the start of 2020 to $2.2 trillion in January 2022.
In December 2021, the US Office of the Comptroller of the Currency (OCC) released its Semi-annual risk perspective. The report outlines the stability risks associated with the crypto-asset and points to work on custody requirements, loan collateral and liquidity requirements for financial institutions wishing to hold such tokens.
Similarly, the Bank of England Report on financial stability December 2021 touches on the growing need to regulate the crypto-asset market to maintain trust and integrity in financial markets. The report notes that while risks are currently limited by “the current rapid pace of growth, and as these assets become increasingly connected to the broader financial system, cryptoassets will pose numerous risks to financial stability.” Last year also saw an increase in enforcement measures aimed at strengthening consumer protection.
Crypto scams on the rise
In August 2021, the Securities and Exchange Commission (SEC) charged Coinschedulea website that lists coin offerings and gives consumers a “trust rating”. He did not disclose to visitors that the coin issuers were paying for the service to promote it, in violation of the SEC’s anti-advertising laws. As it says, promoters of coin offerings representing a security “must disclose the nature, extent and amount of compensation received in exchange for the promotion.” Similarly, the The UK’s advertising watchdog ruled against the promotion of cryptoassets by several companies because they “exploited the inexperience or gullibility of consumers and trivialized investing in cryptocurrencies.”
Furthermore, Elon Musk mentioned Bitcoin and Dogecoin on his personal Twitter account in 2020 and 2021, leading to a very strong increase in prices and volumes. This raises regulatory concerns about market manipulation and opens up a discussion about statements by persons with significant influence over assets that are not subject to securities laws. In turn, fraudsters impersonate influential people in the crypto space in order to steal from consumers. Indeed, the US Federal Trade Commission (FTC) registered a record number of reports of crypto-asset fraud and losses in the first quarter of 2021.
Here too, in the first days of January 2022, several regulators have already announced important actions to address the risk of manipulative advertising for crypto-asset products. The UK and Spain both announced plans to regulate digital advertising to protect consumers from misleading ads, while Singapore took the more drastic step of banning all public advertising of crypto-asset products.
Given the combination of market integrity and consumer protection concerns, Elliptic expects swift regulatory action from financial market regulators and consumer protection agencies during 2022. This will range from requirements for transparency of cryptoasset services offered to consumers, including non-code-based disclosures for DeFi operations, liquidity requirements to ensure consumers can access efficient and sound financial markets. Regulatory bodies such as the US Consumer Financial Protection Bureau (CFPB) will take on an increasingly important role in overseeing the crypto-asset industry – seeking to clarify standards for consumer protection against fraud and manipulation.
At Elliptic, we welcome regulation that increases consumer protection and fosters confidence in the cryptoasset ecosystem, as consumer confidence is critical to enabling adoption of this growing space. We believe that in 2022, it will become increasingly important for exchanges and other service providers to ensure that they are prepared to comply with evolving market integrity and consumer protection rules. Central to this effort will be ensuring they are able to protect their customers from outright fraud and abuse.
For more insight into what 2022 has in store for cryptoasset regulation, pre-register to receive Regulatory Outlook 2022, here.
In 2022, Elliptic predicts that the following five key policy issues will shape cryptocurrency compliance and regulation:
- Regulators will prioritize protecting consumers from fraud and manipulation in the crypto space.
- Regulators will focus their enforcement efforts on DeFi.
- Regulators will respond to money laundering risks involving non-fungible tokens (NFTs).
- VASP due diligence will become a widespread compliance practice.
- The regulatory development of Stablecoin will solidify the convergence of cryptobanking.
Download the full Regulatory Outlook Report 2022, here.
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